A Monday morning – a public holiday – and on a Sydney Harbour foreshore walk, we pause for coffee and green tea at Frenchy’s Café, not far from what, around there, they like to call Mosman “village”, an affluent suburb located on Sydney’s lower north shore. A table of locals is engaged in a heated discussion about a proposal to tax unrealised gains in their super funds. Of all the things going on in the world right now.
The proposed tax, Division 296, is only an issue for anyone with more than $3 million in super. None of the café set appears to be aged under 75, so it’s doubtful they’re going to need more than that to see them out (a couple of them look like making it through coffee is by no means certain).
But they’re complaining the new tax will affect how much they leave for the kids, grandkids and great-grandkids. For them, superannuation is a way to pass onto their families the wealth accumulated in their super – supported at every step, of course, by generous tax concessions.
In a nutshell, this café scene illustrates a lot of what’s wrong with the system. And it’s easy to take cheap shots at individuals who’ve accumulated $3 million – and often a lot more – in super; a certain schadenfreude (perhaps envy) is unavoidable, and naked in some of the reporting of this issue.
The Mosman café crowd might, on one reckoning, be abusing the system, but the fact is they accumulated their account balances legitimately and under the rules that applied at the time, and with which they presumably complied.
Whether or not you agree with taxing “large” balances more, and furthermore whether or not you agree with the government’s preferred approach of taxing unrealised capital gains, it seems unfair to change the rules mid-game and not give individuals an out.
Increasing the tax for an estimated 80,000 Australians seems, on the face of it, to be no big deal. But one thing the government does need to think about carefully is the retrospective nature of the change. Successive governments have been at significant pains to avoid making superannuation changes retrospective.
That’s why the rules of the system have sometimes seemed so convoluted, with individuals grandfathered into some arrangements, cut-off dates set for these rules, and some other rules that only apply after some other date.
Generations of members have benefited from grandfathering in one form or another.
But under the proposed changes, if a member is in the accumulation phase of super and they don’t satisfy a condition of release, they’re trapped. Their super balance will continue to grow, and when they pass the $3 million threshold the tax kicks in. They can’t avoid it – contributions are compulsory and they can’t rearrange their affairs (i.e. take money out of the super system) to not pay it.
If you have money in an accumulation fund by choice (you could have rolled over into an account-based pension or some other retirement product but for whatever reason you’ve chosen not to) then there’s a limit, the transfer balance cap, to how much you can move into pension phase, and that’s well short of $3 million.
Superannuation experts suggest if anyone feels strongly enough about the tax they could change the composition of their investments, switching from growth investments to income-generating investments. However, this could have a detrimental impact on the long-term performance of their fund – and on how much there is, at the end of the day, to pass on to younger generations.
None of this is to argue against meeting the objective of superannuation, recently enshrined in legislation as being to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.
But that definition doesn’t include enriching the offspring of wealthy near-octogenarian superannuants, and it isn’t what the founders – Paul Keating, Bill Kelty and others – and those (mostly Labor) governments that nurtured its growth over decades, necessarily had in mind when the idea of compulsory superannuation was hatched in the early 1990s.
Then, it was conceived as a way to divert part of hard-bargained wage increases into a savings vehicle that would grow over time to supplement the Age Pension. It would also mitigate some of the inflationary pressures caused by those wage increases. And, over time, it would begin to reduce the budget burden and offset the effects of a proportionately dwindling number of workers being asked to pay tax to fund the pensions of a proportionately growing number of retirees.
Australia’s superannuation system is now world-class, a thing of elegance and quite literally a national treasure. It has grown from an idea into a pool of national savings that has smashed through the $4 trillion mark and is on the way to becoming the second-largest pool of private savings on the planet.
This has not happened by accident. Despite often trenchant political opposition, near-constant tinkering with the rules, and some genuine missteps in regulation along the way, the general direction has overwhelmingly been the right one.
It’s arguable superannuation is one of Labor’s greatest achievements, ranking alongside Medicare and possibly even the National Disability Insurance Scheme.
If a government wants to tax returns on the portion of a superannuation balance in excess of $3 million, and even if it wants to tax unrealised gains, that is its right. It’s the reciprocal right of voters to throw the government out if they feel strongly enough about the policy.
No one at the table at the Mosman café is likely to vote Labor, and since the changes only affect 80,000 people anyway it’s unlikely to be the issue on which the Albanese government’s future hinges at the next election.
But changes to a system that give its participants no chance to respond are always better avoided.
Chalmers just fired the starting pistol for the great intergenerational wealth transfer. Investors in pension phase that have accounts in excess of $3M will drain their accounts and buy houses free of capital gains tax for their offspring or assist them in upgrading from $2M houses to more expensive houses as wealth storage silos free on any tax.